Australia GDP Set to Tumble 3% This Quarter Amid Double-Dip Risk

(Bloomberg) -- Australia’s economy is set to contract sharply in the current quarter as the nation’s two largest cities remain shuttered to try to contain an outbreak of the coronavirus delta variant that’s spread along the east coast.

Gross domestic product in the three months through September will decline 3% from the prior quarter, when it rose 0.7%, according to a Bloomberg survey of 16 economists. Estimates ranged from a 4.5% drop at Commonwealth Bank of Australia, the nation’s largest lender, to a 0.5% gain at Morgans Financial.

“Household consumption will bear the brunt of the weakness in the third quarter,” said Su-Lin Ong, head of Australian economic and fixed-income strategy at Royal Bank of Canada. “But additional restrictions suggest a hit to construction -- both residential and non-residential -- is also likely.” 

Roughly half of Australia’s population -- Sydney, Melbourne and national capital Canberra -- is currently under stay-at-home orders as authorities struggle to contain delta. The worsening outbreak has some state leaders shifting to the Northern Hemisphere model of aiming to hit vaccination targets and the trying to live with the virus, as opposed to the previous “Covid Zero” approach.

The drive for 70%-80% vaccination rates to exit lockdowns casts some doubt over the Reserve Bank of Australia’s optimism that the economy will bounce back quickly. It’s basing that expectation on the experience of 2020 and the first half of this year, when authorities managed to contain the virus.

What is likely to be replicated from last year’s lockdown is a jump in the savings rate, which fell to 9.7% in the second quarter from 11.6% in the first three months. JPMorganChase & Co. expects it to be replenished “back into double digits” from a combination of interrupted consumption and income support for lockdown-affected households.

The chances of the economy falling into a double-dip recession depends on how quickly lockdowns are lifted in the months ahead. The risks would rise if they persisted deep into the fourth quarter.

“Much will depend on policy makers’ willingness to re-open, not to mention an ongoing tangible risk that the current delta outbreak in New South Wales and Victoria spreads across state borders,” said Phil Odonaghoe, an economist at Deutsche Bank AG. “While not our base case, a technical recession in the second half of 2021 can’t be ruled out.”

Policy Outlook

The RBA holds its September policy meeting on Tuesday amid questions on whether the worsening health position could prompt it to defer the tapering. 

Governor Philip Lowe restated at the August policy meeting the RBA’s intention to wind back bond buying to A$4 billion ($2.9 billion) a week from the current A$5 billion pace. However, in minutes of that meeting, the board also said it was prepared to respond if further bad health news led to a “significant setback” for the recovery.

Goldman Sachs Inc. expects ongoing mobility restrictions to restrain the rebound in the final three months of 2021, even as governments move to gradually ease those limits. HSBC Holdings Plc.’s Paul Bloxham goes further, saying the big V-shaped recovery from 2020’s lockdowns -- when case numbers returned to near-zero -- is history.

“The tactic has now shifted to ramping up vaccination rates to allow re-opening in the two largest states,” said Bloxham, chief economist for Australia at HSBC. “This means that when re-opening does begin, which we assume will occur in New South Wales from mid-October, the virus case numbers will still need to be managed using suppression measures.”

Australia has imposed restrictions during the pandemic ranging from stay-at-home orders to the closure of venues more frequently than any other country outside of China, according to Bloomberg analysis of Oxford University’s Stringency Index.

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